Oil slipped below $125 a barrel on Tuesday after U.S. gasoline demand data weakened sentiment though the prospect of tighter North Sea supplies and positive economic data provided some support.
Brent crude futures were down 79 cents to $124.64 a barrel by 0856 GMT, after settling up $2.55 on Monday at $125.43.
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U.S. crude futures fell 76 cents to $104.47, after rising by $2.21 in the previous session.
A combination of delays to North Sea loadings, quarterly fund allocations, ongoing uncertainty over Iran and U.S. manufacturing data helped fuel Monday's rally and is likely to keep prices elevated this week, traders and analysts said.
However, there was a small price retracement after the market digested more bearish U.S. oil and gasoline demand data from the Energy Information Administration.
Monday's better-than-expected U.S. manufacturing data from the Institute of Supply Management (ISM) and Sunday's Chinese PMI data had raised hopes of a pick up in demand for fuel.
But some scepticism set in following the softer demand data from the EIA. Although January's demand figures were revised slightly higher, they were still down 4.5 percent year on year, and are at the lowest January level since 2001.
"As prices have risen further since then, I don't expect demand to pick up more than the seasonal pattern, if at all," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "Talk about demand destruction will continue and cap prices."
Trading is thought likely to stay range-bound ahead of the long Easter bank holiday weekend as the market watches for key jobs data from the United States on Friday.
"The market is taking a breather today, and is likely to be subdued for the rest of the week," said Victor Say, an analyst with Informa Global Markets in Singapore.
"No one wants to be caught out during the long weekend, especially if there's a surprise from the U.S. non-farm payrolls report."
Olivier Jakob, oil analyst at Petromatrix in Switzerland, said that Brent was still locked in the trading range it has exhibited since early March.
"The flat price has been doing a series of reversals - we saw a very strong rebound yesterday and now we are having a small price retracement," he said.
The threat of further supply disruptions in the North Sea is helping to keep a floor under Brent, after British oil major BP said it had shut the Valhall platform in the North Sea last week.
This is creating loading delays for one of the four crude oil streams used for the global Brent price benchmark, traders said.
"Supply outtake in the North Sea has now hit at least 160,000 barrels per day," said Michael Poulsen, oil analyst at Global Risk Management.
He suggested a year-on-year decline of 100,000 barrels per day would be a conservative estimate for 2012. "This will support prices, as fear of oil supply is the number one issue in the current oil market."
Traders and analysts also noted that oil futures sometimes benefit from an influx of investor flows at the start of a new quarter as asset allocators rotate into sectors that performed well in the previous quarter.
"Funds may be coming back into the market on the long side at the beginning of a new quarter, and possibly people are wanting to buy ahead of the long weekend rather than wait until Thursday afternoon when the market might be even higher," said Christopher Bellew, an oil trader at Jefferies Bache in London.
"No speculator will want to get caught on the wrong side with a long weekend coming up," agreed Poulsen. "Therefore some 'strange' price movements might occur, as speculators square their books or buy options to protect their current portfolio."
The oil market is awaiting the weekly U.S. inventories figures from the American Petroleum Institute later today. A Reuters poll of analysts has forecast that crude oil stockpiles will rise by 2.1 million barrels.
Traders and investors will also be eyeing the minutes from the U.S Federal Reserve's last policy meeting due today, for any hints of a third round of quantitative easing, which will be supportive for oil prices. (Additional reporting by Francis Kan in Singapore; editing by Jason Neely)